Get Your House in Order

by

11-04-2011

We all know that no-one lives forever and it is much better to have considered your untimely demise than to leave your partners in business and in family matters having to resolve complicated and difficult issues in the event of your death.  Greg Humphreys, a partner in the Commercial Team at Newbury solicitors, Gardner Leader, is keen to ensure that his clients carefully consider the benefits of Shareholder and Cross Option Agreements.

In a recent meeting with a client who is a director and shareholder of a limited company, we discussed company affairs and whether he had any arrangements for his shareholding in the event of his death.  It quickly became apparent that he had made no arrangements.  I explained that without taking further steps there would be no obligation on the other shareholder in the company, who survived my client, to buy out the shares in the company from my client’s beneficiaries.  This may deprive my client’s beneficiaries of a significant source of funds following the death of my client.  Additionally, there was no insurance in place to enable a pay out for purchasing my client’s shares from the beneficiaries in the event of my client’s death.

I suggested my client should put in place a Cross Option Agreement supported by an insurance policy which would pay out in the event of my client’s death.  The Cross Option Agreement would grant rights to the surviving shareholder and to the beneficiaries of my client’s estate to force a sale of the shares to the surviving shareholder.  The surviving shareholder would benefit from the proceeds of the insurance policy taken out by my client, with the proceeds of the policy having been written in trust for the surviving shareholder.

Clients considering this form of arrangement need to decide on the specifics of the policy, including the value of the pay out, which should closely match the value of the shareholder’s interest in the company, and how the price to be paid on the death of the deceased shareholder should be set.

These suggestions can be incorporated into a Shareholders’ Agreement or in a standalone Cross Option Agreement.

The benefits of ensuring a certain transfer of the deceased’s shares far outweigh the potential difficulties that could be experienced by the surviving shareholder or the deceased’s beneficiaries, if for any reason a sale of the deceased’s shares cannot be agreed following his death.

To discuss any of these issues in more detail, please contact Greg Humphreys on 01635 508080 or by email at [email protected].


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